MILLION WAY LTD v. TO SHING WO AND OTHERS

CACV 136/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 136 OF 2010

(ON APPEAL FROM HCA NO. 436 OF 2007)

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BETWEEN

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JUDGMENT

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Hon Kwan JA:

1.  This is an appeal of the 1^st to 4^th defendants from the judgment of Deputy Judge L Chan on 25 May 2010. The proceedings arose out of an agreement for the sale and purchase of land in the New Territories held in the name of Tin Hau Wui (“the Wui”), a Chinese worshipping trust, subject to section 15 of the New Territories Ordinance, Cap. 97. The land in question is registered in the Land Registry as Lot Number 715 in Demarcation District 132 (“the Property”).

2.  The plaintiff sued as the purchaser of the agreement. The 1^st defendants, To Shing Wo and Siu Hing Fong, are sued as the managers of the Wui. The 2^nd and 3^rd defendants are the same individuals, sued in their personal capacity. The 4^th defendant, To Tung Sing, is a member of the Wui.

The background

3.  The relevant background for the purpose of this appeal may be stated as follows.

4.  Interest in the Wui has been divided into nine shares. The shares are held by various villagers of Tuen Tsz Wai, San Hing Tsuen and Chun Uk Tsuen in Tuen Mun, New Territories. The judge found that at all material times, the shares were held by 18 members. Two pieces of land are held by the Wui, one being the Property, which has not generated income for over ten years, and the other has been let for rental. The Wui has distributed income to its members from time to time and organised celebrations to worship the deity Tin Hau. It has no other activity.

5.  On 6 September 2004, the Wui held a meeting and its members resolved to sell the Property to the plaintiff at $200 per sq ft. The minutes (“the September Minutes”) were signed by 14 members. They included the 2^nd, 3^rd and 4^th defendants.

6.  On 4 October 2004, a Chinese provisional agreement for sale and purchase (“the provisional agreement”) was entered into with the plaintiff for the sale of the Property to the plaintiff at $2,613,600. The vendor was the Wui acting by its managers the 2^nd and 3^rd defendants. Clause 8 of this provided that completion shall take place within one month from the date of which the vendor has obtained the consent of the District Officer to the sale and that the vendor shall obtain such consent within one year from the date of the provisional agreement; if the vendor should fail to obtain such consent, the purchaser shall have the right to terminate the agreement and obtain refund from the vendor all deposits and part payment without interest.

7.  The plaintiff later received from the 2^nd and 3^rd defendants a set of documents for submission to the District Officer to apply for consent under section 15 of Cap. 97. They were the September Minutes; an application dated 25 October 2004 by the 2^nd and 3^rd defendants as the managers of the Wui by which they certified that all members of the Wui agreed to the application for consent to sell the Property, with an attached list of members of 16 names (“the Managers’ Application”); and an application for consent to sell the Property of 16 members dated 25 October 2004 (“the Members’ Application”). The 4^th defendant was one of those who had signed. The remaining two members who did not sign on the Members’ Application later signed separate forms for the same purpose dated 9 November 2004 and 18 January 2005. The September Minutes, the Managers’ Application and the Members’ Application were passed on to the plaintiff’s solicitors for the preparation of a formal agreement for sale and purchase in English (“the formal agreement”).

8.  The formal agreement was made on 25 October 2004. The vendor was again described as the Wui by its appointed managers the 2^nd and 3^rd defendants and it was to assign the Property in the capacity as beneficial owner to the plaintiff or its nominee or sub-purchaser. As in the provisional agreement, completion was within one month from the date of receipt of notice of the consent in writing having been granted by the District Officer. However, clause 35(3) of the formal agreement differed from clause 8 of provisional agreement in one respect. Clause 35(3) provided that if the consent is not issued within one year from the date of the formal agreement, the formal agreement “shall so cease to have any effect”, so the agreement would be terminated automatically in that situation. In contrast, clause 8 of the provisional agreement gave the purchaser the right to terminate the sale and purchase if consent of the District Officer is not obtained within a year.

9.  The judge found that the plaintiff’s solicitor Ms Chang had erroneously adopted clause 35(3) from a precedent when she prepared the formal agreement and had made a mistake in thinking that clause 35(3) was the same as clause 8 of the provisional agreement. None of the parties who signed the formal agreement knew English. Ms Chang told the plaintiff’s directors before they executed the formal agreement that the terms in the provisional agreement were incorporated in it. As for the 2^nd and 3^rd defendants, notwithstanding that the formal agreement was correctly interpreted to them by the solicitor of the Wui, the judge found that they do not have the sophisticated mind to be able to tell the difference between the two provisions and they were not aware of the difference between clause 35(3) and clause 8 when they heard the interpretation.

10.  Pursuant to the provisional and formal agreements, the plaintiff paid the Wui $522,720 being 20% of the purchase price as deposit and part payment.

11.  On 26 October 2004, the Wui’s solicitors wrote to the District Officer seeking consent to the sale and submitted the September Minutes, the Managers’ Application and the Members’ Application. The separate application forms signed by the two remaining members were later submitted to the District Officer in November 2004 and January 2005.

12.  On 18 December 2004, the married son of the 4^th defendant, To Luen Hing, wrote to the District Officer objecting to the sale of the Property on the ground that the price was “unreasonable”. To Luen Hing was not in the list of members of the Wui provided to the District Officer. On 7 January 2005, To Luen Hing and the 4^th defendant jointly lodged their objection in writing to the District Officer on the same ground as before. The District Officer notified the Wui’s solicitors there was objection to the sale but did not disclose the identities of the objectors.

13.  On 20 January 2005, the Wui’s solicitors wrote to the District Officer requesting re-consideration of the Wui’s application for consent, stating that all the members of the Wui had consented and had signed all the prescribed forms. The solicitors enclosed a letter dated 18 January 2005 signed by the 2^nd and 3^rd defendants (“the Confirmation Letter”) and another list of members with the names of the 18 members showing how the nine shares of the Wui were held (“the Full List of Members”). It was stated in the Confirmation Letter that apart from those named in the Full List of Members, no other person can participate in any matter in the Wui. The 2^nd and 3^rd defendants did not know the 4^th defendant had made an objection when they provided the Confirmation Letter and thought it was made by somebody unrelated to the Wui.

14.  The District Officer informed the Wui’s solicitors by a letter dated 24 June 2005 that a member had objected to the sale and consent would not be granted unless the difference was resolved. It was also made clear in the subsequent correspondence of the District Officer with the plaintiff’s solicitors that consent would only be given if no objection by a member of the Wui is received or if all such objections received have been withdrawn. Thus, by raising the objection, the 4^th defendant has blocked the grant of consent by the District Officer under section 15.

15.  On 5 December 2005, the Wui’s solicitors wrote to the plaintiff’s solicitors declaring that the formal agreement was terminated on 25 October 2005 pursuant to clause 35(3) thereof. The deposit and part payment of $522,720 was returned.

The respective claims of the parties

16.  The plaintiff issued the writ in this action in March 2007. The statement of claim, as amended three times, claimed inter alia rectification of the formal agreement by replacing clause 35(3) with clause 8 of the provisional agreement; declarations that even without the rectification, the formal agreement is binding on all members of the Wui for a reasonable time from the final judgment of the court and that the 4^th defendant is not entitled to raise or is estopped from raising any objection to the sale; an order requiring the 4^th defendant to withdraw his objection to the sale to the plaintiff and an injunction to restrain him from raising objection; specific performance of the formal agreement as rectified.

17.  The 1^st to 3^rd defendants counterclaimed for a declaration that the formal agreement ceased to have any effect pursuant to clause 35(3).

The judgment

18.  The judge dismissed the claim for rectification, holding that the mistake was unilateral and that the plaintiff had failed to establish that the 2^nd and/or 3^rd defendant was aware of the mistake of the plaintiff’s solicitor. He found in favour of the plaintiff that the 4^th defendant is obliged to the plaintiff and the 2^nd and 3^rd defendants not to do anything to block the granting of consent by the District Officer without good cause and that the objection lodged by the 4^th defendant on 7 January 2005 was without good cause and was wrongful. Hence, time under clause 35(3) should not have run from 7 January 2005, the one-year period has not yet expired and the formal agreement subsists. He granted the declarations sought by the plaintiff, ordered the 4^th defendant to withdraw his objection and granted an injunction against the 4^th defendant from raising objection. He dismissed the claim for specific performance, holding that as performance of the agreement would depend on consent from the District Officer, the court has no power to grant such relief. The counterclaim of the 1^st to 3^rd defendants was dismissed. Costs orders were made premised on the fact that the plaintiff was largely successful in the action.

The issues on appeal

19.  The main point raised on appeal by the defendants is that the judge was in error in holding that the 4^th defendant is obliged to the plaintiff not to do anything to block the granting of consent by the District Officer without good cause. If the defendants should succeed on the main point, it is not necessary to consider the subsidiary points raised by the defendants, or the cross appeal of the plaintiff that the judge was in error in dismissing the claims for rectification and for specific performance of the formal agreement as rectified.

If the 4^th defendant is obliged not to block the granting of consent

20.  The judge held that the 4^th defendant was not privy or a party to the provisional and formal agreements, and that the plaintiff is not entitled to rely on estoppel by convention against the 4^th defendant for that reason. Notwithstanding that, he held that the 4^th defendant has lost his defence for the following reasons. The 4^th defendant’s consent to the sale had contributed to the making of the agreements. The consent of all members, as signified in the September Minutes signed by the 4^th defendant, was relied on by the 2^nd and 3^rd defendants as well as the plaintiff in entering into the agreements. The 4^th defendant’s objection to the District Officer was a derogation of his authority to the 2^nd and 3^rd defendants to enter into the formal agreement with the plaintiff. He is obliged to the plaintiff and the 2^nd and 3^rd defendants not to do anything to block the granting of consent by the District Officer without good cause. His objection lodged with the District Officer on 7 January 2005 was without good cause and was wrongful, as he only made the objection when his son To Luen Hing wanted him to do so. For the above reasons, the judge ordered the 4^th defendant to withdraw the objection lodged on 7 January 2005.

21.  Mr K M Chong and Ms Emma Wong submitted on behalf of the defendants that as the judge has found there was no legal relationship between the plaintiff and the 4^th defendant, there would be no legal basis upon which the judge was entitled to find that the 4^th defendant is obliged to the plaintiff not to raise objection to the District Officer.

22.  Mr Tommy Ho, who appeared on behalf of the plaintiff, acknowledged that if the 4^th defendant was not privy or a party to the provisional and formal agreements, other than a contractual basis there is no basis upon which he could support the judge’s ruling that the 4^th defendant is obliged to the plaintiff not to raise objection. A case of fraudulent misrepresentation was also pleaded against the 4^th defendant, but the judge dismissed the plaintiff’s claim for damages for misrepresentation and this is not the subject of the respondent’s notice. No other case in tort was pursued against the 4^th defendant. Mr Ho contended the judge was in error in holding that the 4^th defendant was not privy or a party to the agreements. So I shall turn to that point.

23.  The judge held that the 2^nd and 3^rd defendants entered into the agreements as the appointed managers of the Wui and they did so pursuant to the powers conferred on them by section 15 of Cap. 97. They also had the authorisation of the unanimous resolution of the members of the Wui in meeting. The Wui is not a legal entity but an unincorporated association. The 2^nd and 3^rd defendants entered into the agreements as trustees of the beneficiaries of the Wui of which the 4^th defendant was one, but the managers were parties to the agreements not the other members.

24.  Mr Ho submitted that the agreements were made by the 2^nd and 3^rd defendants both as the managers of the Wui and as agents or representatives for and on behalf of all the members and in the latter situation the plaintiff had entered into the agreements with all the members. In support of this, he pointed to the fact that the members had signed the September Minutes and the Members’ Application and such overt acts constituted ostensible authority given by them to the 2^nd and 3^rd defendants as their representatives or agents to enter into the agreements with the plaintiff. As found by the judge, the 2^nd and 3^rd defendants knew that they had no power to sell the Property without the agreement of all the members, and the plaintiff, the 2^nd to 4^th defendants regarded the consent as signified by the signing of the September Minutes important for the making of the agreements.

25.  Mr Ho contended that notwithstanding section 15 which gives full powers to the managers of a t’ong to dispose of a property held in the name of a t’ong, it is possible for managers to execute a sale and purchase agreement concomitantly as representatives or agents of all the members of the t’ong. The reason why an agreement would still be entered into with all the members of a t’ong is that under Chinese customary law, land could only be conveyed if the conveyance was executed by all the members.

26.  I reject Mr Ho’s submissions. The relationship between the managers and the members of the Wui is not one of agency but is that of trustee and beneficiaries. The fact that the 2^nd and 3^rd defendants were authorised by all the members to enter into the agreements with the plaintiff did not alter the nature of the managers’ relationship with the members. Whereas an agent can act on behalf of the principal by which the principal and third party are placed in contractual relations, a trustee cannot involve his beneficiaries in such relations but must act so as to be personally liable (Underhill and Hayton, Law Relating to Trusts and Trustees, 16^th ed., page 7).

27.  As for the contention that the agreements were entered into pursuant to the mode of conveyancing under Chinese customary law, all the provisions in the provisional and formal agreements pointed to the contrary. It was clearly envisaged by both agreements that the Property was to be conveyed pursuant to section 15, the vendor was described as the Wui by its appointed managers, and provisions were made for the vendor to obtain consent for the sale from the District Officer. No other method of conveyancing was provided for in these agreements.

28.  The judge was clearly right in holding that the 4^th defendant was not a party or privy to the agreements with the plaintiff.

29.  There being no contractual or any other legal relationship between the plaintiff and the 4^th defendant, the judge was also correct in holding that the plaintiff could not rely on estoppel by convention against the 4^th defendant (Unruh v Seeberger [2007] 2 HKLRD 414, paras. 142 to 146).

30.  Notwithstanding the above rulings, the judge held that the 4^th defendant has lost his defence to the plaintiff’s claim in that he was not entitled to derogate from his authority given to the 2^nd and 3^rd defendants to enter into the agreements with the plaintiff, drawing support from the principle that a party having entered into an agreement subject to a condition precedent is not permitted to do anything to prevent occurrence of the condition without good reason. The judge has fallen into error on this point. The 4^th defendant was not a party to an agreement subject to a condition precedent. There is no legal basis upon which it could be held that the 4^th defendant is obliged to the plaintiff not to do anything to sabotage the agreements between the plaintiff and the Wui acting by its managers.

31.  That is sufficient to dispose of the main point raised in this appeal. It is not necessary to deal with a subsidiary point raised by the defendants that To Luen Hing should have sufficient interest in the Property to lodge an objection to the sale. There was no finding which implicated the 1^st to 3^rd defendants in the objection raised by the 4^th defendant. The failure to obtain consent from the District Officer was not caused by any breach of the vendor’s obligation under the formal agreement. The vendor is entitled to rely on clause 35(3) and the formal agreement was terminated by virtue of this provision. 

The claim for rectification

32.  In view of the above conclusion, it is not strictly necessary to consider the plaintiff’s claim to rectify the formal agreement by replacing clause 35(3) with clause 8 of the provisional agreement. Even if the agreement were to be so rectified, specific performance would not be granted as the agreement remains a conditional sale before the consent of the District Officer has been obtained and this condition precedent will not be fulfilled in view of the 4^th defendant’s objection (Light Ocean Investments Ltd v. Enway Development Ltd [1994] 3 HKC 31 at 39A to C). 

33.  Mr Ho submitted the judge was wrong in holding that rectification is not available as the plaintiff had failed to establish that the 2^nd and 3^rd defendants were aware of the mistake of the plaintiff’s solicitor so that they should be precluded from resisting rectification on the ground that the mistake was unilateral. I have considered the authorities relied on by Mr Ho, including Beale v. Kyte [1907] 1 Ch 564, but do not think they are of assistance or relevance as I agree with the judge that the mistake in this instance was unilateral. The burden is on the party seeking rectification. “Convincing proof” (Joscelyne v Nissen [1970] 2 QB 86 at 98D) is required from the plaintiff to establish not only that clause 35(3) was not in accordance with the parties’ true intentions at the time of execution of the formal agreement, but also that clause 8 of the provisional agreement did accord with their true intentions. Clause 36 of the formal agreement provided that it is to supersede all previous agreements entered into by the parties. In view of the judge’s finding that the 2^nd and 3^rd defendants were unaware of the difference between the two provisions, it does not appear that the convincing proof required for rectification was established.

Conclusion

34.  It is with some regret that I arrive at the above decision, which should not be taken as a charter for beneficiaries of properties held by t’ongs to renege with impunity from agreements they have authorised the managers to enter into. The decision reached above is based on the particular terms of the agreement and with regard to the specific manner in which the plaintiff’s case was framed and pleaded. 

35.  For the reasons given above, I would allow the appeal and dismiss the cross appeal. I would set aside those parts of the order of the judge in the notice of appeal and in lieu thereof declare that the formal agreement had ceased to have effect since 25 October 2005 pursuant to clause 35(3) thereof. Mr Ho has accepted that in the event the appeal is allowed, costs should follow the event and the defendants should have their costs here and below. I propose therefore to order the plaintiff to pay the 1^st to 4^th defendants’ costs of and incidental to the plaintiff’s claim and the counterclaim of the 1^st to 3^rd defendants and that the plaintiff should pay the costs of the 1^st to 4^th defendants of this appeal.

Hon Chu J:

36.  I agree.

Hon Cheung J:

37.  I also agree with the judgment of Kwan JA and the order she proposes. I also wish to stress that the result of this litigation is based only on the way the Plaintiff has chosen to frame and pursue its claim.

Hon Kwan JA:

38.  Accordingly, the appeal is allowed and there will be an order in terms of paragraph 35.